Legal and financial structure of Corporate Venture Capital (CVC) vehicles

Legal and financial structure of Corporate Venture Capital (CVC) vehicles

Corporate Venture Capital (CVC) is an increasingly common practice for companies, giving them more agility for investment opportunity. 

From a legal point of view, the structure of a CVC can take various forms, depending on the objectives of the parent company and local regulations. One of the most common is the internal unit structure, whereby the CVC is set up as an investment unit or division within the parent company itself, which facilitates control and strategic alignment, but may limit flexibility and speed of decision-making. Another is the so-called subsidiary structure, which involves the creation of a subsidiary startup of the parent, i.e. a fully independent subsidiary dedicated to the VC, which allows for greater operational autonomy and may benefit from specific tax incentives.

The less common structure is whereby the company invests in a venture capital fund managed by a third party. This structure provides access to a wider network and the expertise of specialised fund managers.

That said, the optimal CVC structure is one that has a degree of autonomy in investment, allowing it to take advantage of investment opportunities without abandoning the unity factor as part of the parent and collaborating with the other departments. What is common to all VC structures is that the objectives pursued by the parent company will directly or indirectly influence the chosen structure. 

From a financial point of view, the CVC is characterised by the dual focus on financial return and strategic benefit. The form usually takes the form of setting a specific budget earmarked for investments in selected startups. These investments can take various forms, such as direct equity stakes, convertible loans, or future acquisition rights. 

The CVC is mainly funded by the parent company itself, in order to align its strategic interests with the development of startups and emerging technologies.

The CVC is an essential tool for companies that want to get closer to startups and technologies in their market, while seeking financial returns. This strategy allows large companies to get involved in the innovations developed by startups.

Moreover, by establishing a close relationship with start-ups that are developing valuable technologies, companies have the opportunity to help and even incorporate these innovations from the very beginning. In this way, it is possible to combine strategic support with the goal of making financial returns from start-ups. And by investing in promising startups, companies not only benefit from innovation, but also have the opportunity to make significant financial returns.

In order to measure the return on the above-mentioned investments, in addition to the financial returns, it is also necessary to measure the strategic impact on the parent company. Another very important component is the risk of the investment as investments in startups have a risk component due to the high rate of business failure in the early stages of development, however, before the investment is made, thorough due diligence analyses are used to assess the potential success of the startups. This assessment includes a detailed examination of the technology, business model, management team and market conditions. Diversification measures are also often implemented to invest in several startups rather than focusing all resources on one startup.